Why China Might Need a New Economic Model Now

China’s slowing growth

The Chinese economy has seen strong growth over the last two decades. According to Trading Economics, the country’s GDP growth averaged an impressive 9.6% between 1989 and 2017.

However, the country’s economic growth has cooled off. It increased at an annualized pace of 6.5% in the third quarter, its slowest expansion rate since 2009. China’s GDP growth rate hasn’t suddenly decelerated—it has gradually tapered down.

Higher base effect

Given China’s current GDP size, no one expects the country to grow in the double digits like it did a decade ago. However, even the 6.5% GDP growth it reported in the third quarter looks tough to maintain. China’s growth over the last couple of decades has been led by a couple of drivers, namely higher infrastructure investments and rising exports, which many say are state-subsidized.

US companies (SPY) such as Apple (AAPL) have used China (FXI) as a manufacturing base due to its low-cost advantage. However, as Chinese leadership has realized, this model has a limit, which is evident in China’s falling growth rates. Real estate development, which has been another key driver of China’s growth (BABA) (BIDU), isn’t sustainable either, as is visible in ghost cities and unoccupied houses across the country.

To steer its economy away from the middle-income trap, China has been taking measures that some call “China 2.0.” In the next article, we’ll discuss the various challenges facing China’s transition to the next level.